South Africa’s budget hits right notes but won’t stave off downgrade

In times of crisis budget speeches are usually a lugubrious affair. The first by finance minister Pravin Gordhan since his return to the post is somewhat cheerful.

He did well to highlight the tough economic times we are in, but did not compound the gloom with big announcements of structural reforms. Yet it is necessary to take the pain now, and have gratification later.

Lacking presidential support

With the 2016 local government elections a few months away, it was going to be very hard for Gordhan to announce deep and sweeping cuts, except those that are on the margins. While the budget was positive, it will be insufficient to stave off a possible sub-investment downgrade. There is no sensible political strategy that anchors the budget.

In any case, to drive bold economic reforms, Gordhan would need President Jacob Zuma’s undivided support. Signs suggest that he does not have such support. A few days before Gordhan gave his budget, Zuma muddied the waters by suggesting that his dubious appointment of Des van Rooyen to replace Nhlanhla Nene in the finance post in December was a stroke of genius. Clearly unrepentant, he said:

You know van Rooyen is my comrade, MK for that matter. He is a trained finance and economic comrade and more qualified than any minister I have ever appointed, in the finance issue.

Zuma’s remarks were not just disrespectful to Gordhan, especially on the eve of the budget, but showed the extent to which the president is disconnected from the country’s economic realities.

Cost cutting superficial

Beyond cost cutting measures, including on personnel expenditure and freezing of posts, the substance of reforms was trifling. There was no actionable commitments set out against which government can be held to account.

On big-ticket items such as, for example, reducing the size of government which comprises 73 cabinet members (35 ministers, and 38 deputy ministers), plus the president and his deputy, Gordhan was timid. Even though this is not his call to make, he occupies a powerful position to signal his view on how to go about overhauling the public service. Yet such massive restructuring of government would lay an important basis for building a new social pact and build trust with a sceptical public that sees government as a trough for cronies.

Policy uncertainty

There are a number of elements that were set out in the budget vote, and which have a bearing on politics and institutions.

The first is policy uncertainty. Gordhan did well by emphasising this issue as a contributor to the dismal performance of South Africa’s economy. In the past, government has been hiding behind the global economic headwinds, including troubles in emerging markets, without admitting that its own policy stance and poor leadership have weighed heavily on the country’s economic performance.

Gordhan’s answer is to put the four-year-old National Development Plan, the ANC government’s plan to fight poverty and reduce inequality, back in the spotlight. He made the point that it is what guides the budget. It needs retooling if it is to be a credible programme for policy implementation. A clear and concise action plan with measurable outcomes is what is needed to drive change.

Investing in growth and education

The second aspect has to do with infrastructure investment, both hard and soft. Maintaining infrastructure investment is critical during times of low growth. There is growing consensus globally that fiscal consolidation should be balanced with sustained investment in infrastructure. An innovative approach to achieving some of the targeted outcomes will entail drawing upon the resources and expertise of the private sector. In some instances this would be through private-public partnerships. The approach, if used well, could ease burden on the fiscus.

Even with respect of the programmes of state-owned enterprises (SOEs), co-financing with the private sector will help to spread risk and bring about efficiencies. But there are areas where privatisation is necessary, such as the announced partial privatisation of South African Airways after rationalisation with SA Express.

On infrastructure broadly, Gordhan highlighted hard infrastructure areas such as energy; transport logistics and infrastructure; as well as social infrastructure in regards to housing; health facilities; and education. These are critical enablers of growth, and are components of the R870 billion public sector infrastructure budget over the next three years. Again, this cannot substitute for long-term investment by the private sector in order to expand economic activity.

Measures that Gordhan announced, such as creating a one-stop shop, otherwise known as Invest SA, to support investors look good on the surface. Successful one-stop shops are underpinned by transparent policies built on the idea that a country is open for business, entrepreneurs are supported, and that government champions foreign investment.

The third politically potent area is that of education. Again here Gordhan deserves accolades for injecting more resources into higher education. He allocated R16 billion over the next three years, funded through re-prioritisation and allocations.

But, South Africa’s higher education sector would require significant resourcing for the foreseeable future, if we are to avoid more protests over fees and avert a decline in the quality of infrastructure, educational resources, and programmes.

Fixing public enterprises

Finally, Gordhan touched on the vexed issue of state owned enterprises (SOEs). He highlighted the challenges that this sector faces, including governance, financial management, and operational inefficiencies. The recent problems uncovered by the Public Protector at the South African Post Office, at the heart of which are financial mismanagement, dodgy procurement practices and poor leadership are emblematic of the condition of key SOEs in the country.

Gordhan reinforced the Presidential Committee on SOE Report, referring to it as “the recently released report”. Chaired by Riah Phiyega, this committee released its report in May 2013. There have been a number of developments since, which did not take into account the report’s recommendations. These developments include corporate governance failures and intimations of political interference at Eskom; and the re-assignment of the South African Airways from the political oversight of the Department of Public Enterprise to the National Treasury.

The Phiyega report cited by Gordhan is convoluted and with no precise action plan.

No doubt, Gordhan has a clear grasp of what is required to reignite growth in the economy, but politics constrains him from undertaking bold economic reforms. He lacks the support of his president. There may be relief for now from austerity measures, but his measures are hardly sufficient to avert sub-investment downgrade in the months to come. That will be the tipping point for real change in our institutions, politics and economy.